Forfeiture: Relief despite deliberate breach of keep open covenant

Summary: SHB Realisations Limited v Cribbs Mall Nominee (1) Ltd [2003] WLUK 588

SHB Realisations Limited, formerly known as BHS were the tenant of a unit in The Mall, Cribbs Causeway, Bristol under a long lease. BHS went into liquidation and failed to keep the store open in breach of the lease.

The landlord (Cribbs) served a section 146 notice to warn that the lease would be forfeited, citing breach of a covenant to keep the store open. BHS and its mortgagee applied for relief from forfeiture, although they did not specify on what particular grounds relief was sought.

Bristol County Court awarded relief from forfeiture, but only on the condition that the lease was assigned by 5pm on 28 June 2019, so that a new entity could trade from the premises.

The facts

BHS was granted a 125 year lease at a peppercorn rent in exchange for a premium of £7,050,000 in 1998. In breach of a covenant to keep the premises open for business and maintain active trade, the unit closed permanently in August 2016 shortly before BHS went into administration.

Cribbs served a section 146 notice on BHS, followed by forfeiture proceedings. BHS, with its lender, subsequently sought relief from forfeiture. BHS's lender was seeking to find an assignee that could perform the keep open covenant and therefore remedy the breach, given that a substantial premium had been paid for the lease.

At the date of the hearing, the lease had not been assigned and BHS wanted a further 6 months to find an assignee from the date of Judgment.

The applicable law

Relief from forfeiture is a discretionary equitable remedy and the Court has the widest possible discretion to award it. When exercising its discretion, the Court will, amongst other things, take into account the tenant's conduct, the nature and gravity of the breach, and its relationship to the value of the property.

Arguments before the Court

The Court gave regard to the following factors when determining whether to exercise its discretion to grant relief from forfeiture:

• BHS was in deliberate but not wilful breach of covenant, not caused by third parties.
• The lease was still worth c.£1,000,000 and BHS should not be deprived of the opportunity to realise that value to reduce its debts.
• BHS's lender was a secured creditor and should not be deprived of its security.
• There was still a real rather than fanciful prospect of finding an assignee for the lease in the open market.
• The breach of covenant was incurable and would continue until an assignee was found, who opened the store again for business.
• Until the store reopened, Cribbs would suffer ongoing damage, together with its other tenants at The Mall, as the fourth largest store had been closed and boarded up.
• If Cribbs remained unable to recover possession, it would be unable to devise and implement strategies for The Mall incorporating the unit.
• BHS and their lenders' hands were not "clean" – they had conspired to present a "phantom" purchaser to Cribbs with the aim of securing a surrender.

Although the Court considered the windfall that Cribbs would obtain if the lease was forfeited, it did not give it "great weight" in these circumstances, when carrying the balancing exercise.

The decision

It was decided that BHS was entitled to relief from forfeiture on the condition that the lease was assigned by 5pm on 28 June 2019 (ie 3 months from the date of Judgment).

This was despite the fact that the lease had been marketed since June 2016 and an acknowledgement by the Court that there is only "some slight interest in the lease" from potential assignees.

Our comment

The case confirms that, in theory, a lease can be forfeited for breach of a keep open covenant and re-affirms the central purpose of being able to remedy the breach when considering relief.

It also establishes that there will be limits to the time allowed to a tenant to use assignment of the lease as an indirect means of remedying persistent breaches of covenant, even when the outcome of forfeiture is so beneficial to the landlord and so detrimental to a lender.

Given the increasing demise of high street retail businesses and the insolvency of a number of long-established brands, it seems likely that similar situations will arise where the interests of the landlord are pitted against those of a tenant/lender.